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The word commodity came into use in English in the 15th century, from the French
commodit, "amenity, convenience". Going further back, the French word derives fr
om the Latin commoditas, meaning "suitability, convenience, advantage". The Lati
n word commodus (from which English gets other words including commodious and ac
commodate) meant variously "appropriate", "proper measure, time, or condition",
and "advantage, benefit".
Types of commodity
The term commodity is specifically used for an economic good or service when the
demand for it has no qualitative differentiation across a market.[1] In other w
ords, a commodity good or service has full or partial but substantial fungibilit
y; that is, the market treats its instances as equivalent or nearly so with no r
egard to who produced them. As the saying goes, "From the taste of wheat, it is
not possible to tell who produced it, a Russian serf, a French peasant or an Eng
lish capitalist."[2] Petroleum and copper are other examples of such commodities
,[3] their supply and demand being a part of one universal market. Items such as
stereo systems, on the other hand, have many aspects of product differentiation
, such as the brand, the user interface and the perceived quality. The demand fo
r one type of stereo may be much larger than demand for another.
In contrast, one of the characteristics of a commodity good is that its price is
determined as a function of its market as a whole. Well-established physical co
mmodities have actively traded spot and derivative markets. Generally, these are
basic resources and agricultural products such as iron ore, sugar, rice. Soft c
ommodities are goods that are grown, while hard commodities are ones that are ex
tracted through mining.
There is another important class of energy commodities which includes electricit
y, gas, coal and oil. Electricity has the particular characteristic that it is u
sually uneconomical to store; hence, electricity must be consumed as soon as it
is processed.
Commoditization occurs as a goods or services market loses differentiation acros
s its supply base, often by the diffusion of the intellectual capital necessary
to acquire or produce it efficiently. As such, goods that formerly carried premi
um margins for market participants have become commodities, such as generic phar
maceuticals and DRAM chips. An article in The New York Times cites multivitamin
supplements as an example of commoditization; a 50 mg tablet of calcium is of eq
ual value to a consumer no matter what company produces and markets it, and as s
uch, multivitamins are now sold in bulk and are available at any supermarket wit
h little brand differentiation.[4] Following this trend, nanomaterials are emerg
ing from carrying premium profit margins for market participants to a status of
There is a spectrum of commoditization, rather than a binary distinction of "com
modity versus differentiable product". Few products have complete undifferentiab
ility and hence fungibility; even electricity can be differentiated in the marke
t based on its method of generation (e.g., fossil fuel, wind, solar), in markets
where energy choice lets a buyer opt (and pay more) for renewable methods if de
sired. Many products' degree of commoditization depends on the buyer's mentality
and means. For example, milk, eggs, and notebook paper are not differentiated b
y many customers; for them, the product is fungible and lowest price is the main
decisive factor in the purchasing choice. Other customers take into considerati
on other factors besides price, such as environmental sustainability and animal
welfare. To these customers, distinctions such as "organic versus not" or "cage
free versus not" count toward differentiating brands of milk or eggs, and percen
tage of recycled content or Forest Stewardship Council certification count towar
d differentiating brands of notebook paper.
Global commodities trading company
This is a list of companies trading globally in commodities, descending by size
as of October 28, 2011.[6]
Glencore International AG
Salam Investment
Archer Daniels Midland
Gunvor (company)
Mercuria Energy Group
Noble Group
Louis Dreyfus Group
Bunge Limited
Wilmar International
Olam International
Commodity trade
Main articles: Futures exchange and Commodity market
In the original and simplified sense, commodities were things of value, of unifo
rm quality, that were produced in large quantities by many different producers;
the items from each different producer were considered equivalent. On a commodit
y exchange, it is the underlying standard stated in the contract that defines th
e commodity, not any quality inherent in a specific producer's product.
Commodities exchanges include:
Bourse Africa (formerly GBOT)
Bursa Malaysia Derivatives (MDEX)
Chicago Board of Trade (CBOT)
Chicago Mercantile Exchange (CME)
Dalian Commodity Exchange (DCE)
Euronext.liffe (LIFFE)
Kansas City Board of Trade (KCBT)
London Metal Exchange (LME)
March Terme International de France (MATIF)
Multi Commodity Exchange (MCX)
National Commodity and Derivatives Exchange (NCDEX)
National Commodity Exchange Limited (NCEL)
New York Mercantile Exchange (NYMEX)
Mercantile Exchange Nepal Limited (MEX)
Markets for trading commodities can be very efficient, particularly if the divis
ion into pools matches demand segments. These markets will quickly respond to ch
anges in supply and demand to find an equilibrium price and quantity. In additio
n, investors can gain passive exposure to the commodity markets through a commod
ity price index.
Commodity as a new asset class for pension funds and SWFs
In order to further diversify their investments and mitigate the risks associate
d with inflationary debasement of currencies, an increasing number of pension fu
nds and sovereign wealth funds are allocating more capital to non-listed assets
such as a commodities and commodity-related infrastructure.[7]
Inventory data
The inventory of commodities, with low inventories typically leading to more vol
atile future prices and increasing the risk of a "stockout" (inventory exhaustio
n). According to economist theorists, companies receive a convenience yield by h
olding inventories of certain commodities. Data on inventories of commodities ar
e not available from one common source, although data is available from various
sources. Inventory data on 31 commodities was used in a 2006 study on the relati
onship between inventories and commodity futures risk premiums.[8]
Commodification of labor
See also: Labour is not a commodity
In classical political economy and especially in Karl Marx's critique of politic
al economy, a commodity is an object or a good or service ("product" or "activit
y"[9]) produced by human labour.[10] Objects are external to man.[11] However, s
ome objects attain "use value" to persons in this world, when they are found to
be "necessary, useful or pleasant in life,"[12] "Use value" makes an object "an
object of human wants,"[13] or is "a means of subsistence in the widest sense."[
As society developed, people found that they could trade goods and services for
other goods and services. At this stage, these goods and services became "commod
ities." Commodities are defined as objects which are offered for sale or are "ex
changed in a market."[15] In the marketplace, where commodities are sold, "use v
alue" is not helpful in facilitating the sale of commodities. Accordingly, in ad
dition to having use value, commodities must have an "exchange value" a value that
could be expressed in the market.[16]
Prior to Marx, many economists debated as to what elements made up exchange valu
e. Adam Smith maintained that exchange value was made up of rent, profit, labour
and the costs of wear and tear on the instruments of husbandry.[17] David Ricar
do, a follower of Adam Smith, modified Smith's approach on this point by allegin
g that labour alone is the content of the exchange value of any good or service.
[18] While maintaining that all exchange value in commodities was derived direct
ly from the hands of the people that made the commodity, Ricardo noted that only
part of the exchange value of the commodity was paid to the worker who made the
commodity. The other part of the value of this particular commodity was labour
that was not paid to the worker unpaid labour. This unpaid labour was retained by
the owner of the means of production. In capitalist society, the capitalist owns
the means of production and therefore the unpaid labour is retained by the capi
talist as rent or as profit. The means of production means the site where the co
mmodity is made, the raw products that are used in the production and the instru
ments or machines that are used for the production of the commodity.
However, not all commodities are reproducible nor were all commodities originall
y intended to be sold in the market. These priced goods are also treated as comm
odities, e.g. human labour-power, works of art and natural resources ("earth its
elf is an instrument of labour"),[19] even though they may not be produced speci
fically for the market, or be non-reproducible goods.
Marx's analysis of the commodity is intended to help solve the problem of what e
stablishes the economic value of goods, using the labor theory of value. This pr
oblem was extensively debated by Adam Smith, David Ricardo[20] and Karl Rodbertu
s-Jagetzow among others.
All three of the above-mentioned economists rejected the theory that labour comp
osed 100% of the exchange value of any commodity. In varying degrees, these econ
omists turned to supply and demand to establish the price of commodities. Marx h
eld that the "price" and the "value" of a commodity were not synonymous. Price o
f any commodity would vary according to the imbalance of supply to demand at any
one period of time. The "value" of the same commodity would be consistent and w
ould reflect the amount of labour value used to produce that commodity.
Prior to Marx, economists noted that the problem with using the "quantity of lab
our" to establish the value of commodities was that the time spent by an unskill
ed worker would be longer than the time spent on the same commodity by a skilled
worker. Thus, under this analysis, the commodity produced by an unskilled worke
r would be more valuable than the same commodity produced by the skilled worker.
Marx pointed out, however, that in so